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INVESTMENT STRATEGY QUARTERLY RECAP
Economic and financial market headwinds for the next six to twelve months include earnings growth, Federal Reserve policy, global economic growth, the U.S. presidential election, and geopolitical uncertainty. Top tailwinds include low interest rates and energy prices, strong consumer fundamentals, an improving labor market and a stabilizing U.S. dollar.

U.S. ECONOMY – Scott Brown, Chief Economist, Equity Research
FEDERAL RESERVE

• In August, Federal Reserve officials, including Chair Janet Yellen, appeared to be setting the stage for a September rate hike. However, since then, many of the economic data releases have been on the soft side of expectations, and the Federal Open Market Committee (FOMC) did not raise the federal funds rate at its September 21 policy meeting.

• In its policy statement, the FOMC noted that while the case for an increase “has strengthened,” the committee “decided, for the time being, to wait for further evidence of continued progress toward its objectives.” Three of the ten FOMC members dissented in favor of an immediate increase. Ten of the 17 senior Fed officials expect to raise rates by the end of this year, but officials also foresaw a lower path of rate hikes in 2017 and 2018 than they did three months earlier.

• “The Fed does not want to shock the financial markets. Raising rates in September would have gone against market expectations. Fed decisions will remain data-dependent, but a December move is more likely than not.”

BUSINESS VERSUS CONSUMER SPENDING

• “Soft trends continue in business fixed investment worldwide. Manufacturing has been mixed, but generally down slightly or flat. These figures aren’t recessionary, just sluggish.”

• “Consumer fundamentals are still positive at this point. Job growth is healthy, we are seeing moderate wage increases, and gasoline prices are still relatively low. With consumers representing about 70% of the economy, that’s all very helpful.”

FISCAL POLICY

• “We are seeing greater calls for fiscal stimulus, both in the U.S. and worldwide. Both U.S. presidential candidates have proposed an increase in infrastructure spending. The problem is, it’s not going to be as effective in boosting overall growth as it would have been in the depth of the recession, and federal budget constraints will become more worrisome as the baby-boom generation continues into retirement.”

U.S. EQUITIES

• “Increased dispersion and lower correlations give you greater alpha opportunity. When stocks are neutrally valued or overvalued, you want active management. The cheap beta trade is over.”

– Jeff Saut, Chief Investment Strategist, Equity Research

• “Technical readings are still strong. When the market seems like it should be going down and it just keeps dragging up, it’s usually a good sign. It’s usually a sign that things are a lot better than the market expects.”

– Andrew Adams, CMT, Senior Research Associate, Equity Research

EARNINGS

• “As far as profits go, there was a trough in the fourth quarter of last year. Historically, you typically need a dearth in profits in order to have a recovery.”

• “The markets are transitioning from an interest rate-driven bull market to an earnings-driven bull market.”
– Jeff Saut, Chief Investment Strategist, Equity Research

• “If you look back over the last 25 years or so, earnings don’t usually level off and then go back down. Usually you see a sharp decline, they level off and then go back up, which is what it seems we are seeing now. I am in the camp that we have probably seen an earnings trough and things are going to get better.”

– Andrew Adams, CMT, Senior Research Associate, Equity Research

• “Companies need to get away from financial engineering and focus on investing shareholder money for long-term competitive advantage and growth, not current yield.”

– James Camp, Managing Director of Fixed Income, Eagle Asset Management*

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Investment Strategy Quarterly October 2016 Earnings was last modified: October 11th, 2016 by Quintus

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